Does Investing in Private Securities Make Sense for Mutual Funds?

With the rise of index funds, actively managed funds are looking for ways to distinguish themselves by buying into private companies. Mutual funds can invest up to 15 percent of their assets in illiquid or restricted securities such as private companies. One of the leading mutual funds investing in private companies is Fidelity’s flagship Magellan Fund. Using the Magellan Fund as an example, we explore how the Magellan Fund has accounted for the private investments performance and whether the Magellan Fund has manipulated the performance of their private holdings in any way to inflate their net asset value. In addition, we analyze the performance of the private company holdings through time to assess the recorded performance prior to the private holding going public or being sold and the subsequent performance of the holdings after the private companies have gone public.